Do You Give to Charity? If So, With the New Tax Laws, You Need to Read This!

Maura Schauss |

By Maura C. Schauss, CFP

Bread and butter. Romeo and Juliet. Nuts and bolts. Salt and pepper. Love and marriage. Tax planning and philanthropy. Some things were just meant to go together.

If that last pair caught you off guard, you’re probably not alone. Though it may not seem like it, tax planning and philanthropy really do go hand in hand. But with the new tax law passed by Congress on December 20, 2017, many people are reconsidering how they give to charity. Here’s why:

Tax Changes & Charitable Giving

Two major tenets of the new tax bill is an increase in the standard deduction and a reduction of many itemized deductions. Currently, about 30% of households itemize their deductions, and the majority of that percentage is made up of those with high-incomes. (1) But with the most recent changes, it is predicted that less than 8% will itemize going forward. (2)

How does this impact charitable giving? If you take the standard deduction, you cannot deduct your charitable contributions from your income taxes. Since 82% of tax returns claim charitable contributions, this change could affect a lot of people. (3) But it also opens a new opportunity. You now have the freedom of separating the giving decision from the tax decision, and there’s no better example of this than a donor-advised fund.

What Is A Donor Advised Fund?

A donor-advised fund (DAF) is like a philanthropic savings account. You put money into it for the purpose of giving to charity but you can let it sit there awhile until you are ready to give. Unlike a savings account, though, all contributions are irrevocable. Once you put an asset in a DAF you can’t take it back. Though you don’t technically retain ownership when you put money or assets into a DAF, you still retain control. You get to name your DAF account, advisors, successors, and beneficiaries.

What Are The Tax Benefits Of A Donor Advised Fund?

Donor-advised funds allow you to get an immediate tax benefit for charitable gifts that you will make in the future. For example, maybe you normally give $10,000 a year. Under the new tax bill, that amount alone won’t be enough to make it worth itemizing. But if you open a donor-advised fund and contribute $50,000 up front, that takes you above the $24,000 standard deduction, giving you a major tax benefit. Then, you can divvy up that $50,000 to charities over the next five years.

Any limit to the deduction you are allowed to take depends on what kind of assets you contribute to the DAF.

Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it is worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.

Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted growth income (AGI). For all other contributions, including cash, you can deduct up to 60% of AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.

Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.

Is A Donor-Advised Fund Right For You?

Do you consistently give to charities? Do you also want to minimize your tax liability? A donor-advised fund might be the answer, especially with the changing tax landscape. At Washington Wealth Advisors, one of the things that sets us apart is our integrated approach. We work with other members of your financial team, such as your CPA or attorney, to gain a better understanding of your current financial position and help you make decisions that will keep you on track to achieve your financial goals. If you are interested in adding a donor-advised fund to your financial arsenal, schedule a meeting with Maura to start the process.

About Washington Wealth Advisors

Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.

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(1) https://taxfoundation.org/who-itemizes-deductions/

(2) https://www.forbes.com/sites/ryanellis/2017/11/22/nine-in-ten-will-claim-the-standard-deduction-under-tax-reform-according-to-new-white-house-study/2/#4ab0012213ba

(3) https://www.fool.com/retirement/2017/03/12/the-average-americans-tax-deductions-by-income.aspx